Should South Africa’s central bank — the SARB – strike first with an interest rate hike before being forced into it? Gill Marcus and her team started their two-day policy meeting today and no doubt have been keeping an eye on happenings in Turkey, a place where a pre-emptive rate hike (instead of blowing billions of dollars in reserves) might have saved the day.

The SARB is very different from Turkey’s central bank in that it is generally less concerned about currency weakness due to the competitiveness boost a weak rand gives the domestic mining sector. This time things might be a bit different. The bank is battling not only anaemic growth but also rising inflation that may soon bust the upper end of its 3-6 percent target band thanks to a rand that has weakened 15 percent to the dollar this year.

Interest rates of 5 percent, moreover, look too low in today’s world of higher borrowing costs – real interest rates in South Africa are already negative while 10-year yields are around 2.5 percent (1.5 percent in the United States). So any rise in inflation from here will leave the currency dangerously exposed.

The fear is that, by continuing to run very low interest rates on the premise that it is protecting domestic economic growth…the central bank is setting up the economy for less price stability, more uncertainty and higher variability in the rand outcome. South Africa can ill-afford another blow-off in the rand…Dismissing the possibility that the SARB may be forced into a hike is dangerous as another bout of rand weakness could push the inflation rate above the 7% mark at which point the question then morphs into how much above the 6% level the SARB will tolerate.

Analysts at Barclays write:

Other EM central banks such as Turkey, Brazil and Indonesia have tightened their respective policy stances of late and the rand might come under selling pressure over the medium term from a relative real interest rate perspective if inflationary pressures gain traction.

Analysts polled by Reuters expect the SARB to make no move on Thursday, though some reckon a change in stance to neutral from dovish is possible. Swaps markets, on the other hand, are pricing a 20 basis-point tightening this month and 100 bps over the next 12 months, moving away from the rate cuts they were expecting just a few weeks back.